By Ed Conway, Economics Editor
The Bank of England has taken its first major step to clamp down on rising house prices and ballooning household debt levels, cutting the incentives for banks to lend to consumers.
The Bank's Financial Policy Committee (FPC), chaired by Governor Mark Carney, said that starting from January banks would no longer get cheap loans from the Bank in exchange for lending to households through mortgages and other debt.
The move is likely to reduce the amount banks are willing to lend on home loans and may push up mortgage rates.
Shares in major housebuilders including Persimmon, Barratt Developments and Taylor Wimpey fell more than 6% immediately after the announcement.
The Bank also revealed new research showing that households with loan-to-income ratios greater than five now account for around a fifth of total UK mortgage debt, in the latest sign of overheating in the housing market.
Persimmon was among the stocks hit following the bank's announcement The decision will be seen as a significant shift from the Bank, which until now had insisted that it was comfortable with rates of house price inflation, which on some metrics are rising at the fastest rate since the crash of 2008.
The FPC said from here on the Funding for Lending scheme, under which banks receive cheap funding from the Bank of England for every pound of net lending they themselves hand out, would be focused entirely on small businesses.
Banking analysts have claimed that by far and away the biggest impact of Funding for Lending had been to boost lending levels to households, and to help reduce the borrowing rates they face.
The move may come as an embarrassment to the Chancellor, as it will mean the Bank is effectively clamping down on the housing market at precisely the same time as the Treasury is attempting to stimulate it through his new Help to Buy scheme.
However, the Bank said that while it had the power to recommend changes to Help to Buy, it did not think any were necessary at present.
The report said: "Rising house prices - and any subsequent falls - needn't in themselves pose a threat to financial stability.
"It is the interaction of developments in the housing market with a range of factors, including household indebtedness and leverage in the banking sector, which gives rise to financial stability risks."
Mr Carney said: "Over the past year the Funding for Lending scheme has contributed to the recovery by helping to significantly improve credit conditions, especially for households.
"The changes announced today refocus the FLS where it is most needed - to underpin the supply of credit to small businesses over the next year - without providing further broad support to household lending that is no longer needed."
George Osborne said he agreed that with the housing market starting to pick up, "it is right that we focus the scheme's firepower on small businesses".
"Small firms are the lifeblood of our economy. That's why we're reforming the banks, introducing the employment allowance and now focusing the Funding for Lending scheme to support them," he said.
The Council of Mortgage Lenders reacted to the decision by saying it reflected the improvement in funding market conditions that had been experienced in recent months.
CML director general Paul Smee said: "Although the changes to the FLS may be a surprise, they are not a shock.
"Mortgage lenders are well equipped to meet their funding needs, as wholesale funding market conditions have improved and retail deposits are robust."
The House Builders Federation added: "The economy is in a much stronger position than when FLS was introduced and lenders are now much more able to meet the funding requirements of home buyers.
"In addition the Help to Buy equity loan scheme is now in place and is driving sales and stimulating higher levels of house building."
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